The Dividend Cafe - No Protection in Protectionism: Investors, Immigration, and More

Episode Date: February 2, 2017

No Protection in Protectionism: Investors, Immigration, and More by The Bahnsen Group

Welcome to this week's Dividend Cafe podcast. The month of January ended this week and stock investors are likely happy, certainly compared to how January went just one year ago, the worst January in stock market history. The political climate right now is certainly heated and we want to get through a lot of the noise and evaluate the lay of the land for what actually matters to investors. There are a lot of charts at DividendCafe.com this week, so I kind of have to skip over some of that into the podcast. But we do think there's a lot of interesting perspective we want to share. Let's get into it. As earnings go, so goes the stock market. I repeat this all the time. It is a permanent truism. I really wish you would write on your hearts, if you will,

corporate profits are the mother's milk of stock investing. And of course, the same can be said to their efficacy in the entire broad economy. Profits drive capital expenditures. Profits drive wage growth. Profits drive business investment. And profits drive innovation. Corporate profits and S&P operating earnings nearly mirror each other. And the growth of earnings is the catalyst to stock market growth. Well, this incredible bull market rally that began eight years ago began because earnings growth had bottomed. And as that bottoming had

become evident, we knew that earnings had nowhere to go but grow higher. And of course, stock prices then began to grow. The question now, I don't believe anyone knows the answer to, is whether or not the profit growth deceleration has ended or, as Q3 suggested suggested maybe the bulls are just getting started. Building a wall around a border tax? The American people are currently subject to a nearly daily grind of discussion around very complex concepts very few of the people reporting on actually understand. There are a number of policy matters at play right now with the Trump administration in Mexico, and when intersected together, have implications to investors. First, we know that President Trump

campaigned on the idea of building a wall at the U.S.-Mexico border as a means of controlling immigration and security better. He further campaigned on this happening with Mexico paying for it. Second, we know that President Trump campaigned on wanting to reduce trade deficits and see better terms in our trade deals, notably with China and Mexico. And third, we know that the Trump administration and the GOP House are looking for a deficit-neutral tax reform bill, lowering tax rates without blowing out deficits. It would appear that through the noise, drama, and twitter of it all, one particular policy proposal may be at the epicenter

of all three of these things simultaneously. This border adjustment tax being thrown around frequently, which would look to tax imports but not exports, giving an advantage to companies who export goods, giving revenue to the treasury from companies and countries that have looked to send products to America, say from Mexico for example, and then giving Trump cover to claim that Mexico paid for the wall by saying this border adjustment tax generated the revenue for it. A border adjustment tax is said to not be a tariff because in theory the dollar appreciates to offset the benefit. However, given present dollar strength, it really is very tricky to calculate how that would play out. The Trump administration is wise to pursue a policy like this

versus an outright tariff which will hurt consumer prices. But the complexity of this in light of currency exchange rates is something we have to watch from an investment perspective. February follies are not fun. What surprises me most when one looks at the actual history of how February returns for new presidents have gone is that anybody would conclude that the data says something indicative, let alone conclusive, about how stock markets do in the first month of a new president. What you see out of the last nine new presidents, maybe, I'm sorry,

it's 11 total, you see four positive months, five negative months, and two flat months. So really nothing to write home about, pretty much right around that flat end. Now, you know, the first presidential month for President Obama and President Bush before him were very negative for different reasons. So there is some recent history there. I think that the market could go up this month and I think the market could go down. And I'll play those same odds to the next month after that as well. Aid is enough.

February 2017 will represent the 12th month of an eight-year bull market that began in March of 2009. It's faced minimal interruption since. In spring of 2010, particularly summer of 2011, there were some globally driven disruptions of note, but in both cases the market drop proved very short-lived. In August 2015 and January 2016 there was some downside volatility but again it was short-lived. So there was a kind of generally flat period from mid 2014 mid 2016 but the bull market that began eight years ago has continued without the onset of a bear market a 20% drop. Will eight years ago has continued without the onset of a bear market, a 20% drop. Will eight years be enough for this bull or is there more life in it? We believe that generally

speaking, bear markets come about for one of two reasons, either recessions or valuation bubbles. There's a sort of black swan events that become problematic for markets too. Awful events not easily predicted or foreseen are usually recession creating things or news oriented events. The way we protect against bear markets, the things that we believe are generally impossible to time, is to stay vigilant and looking for recessions. It's also very hard to time. And we are vigilant and looking for valuation bubbles.

The plethora of indicators we look at now that we find useful in evaluating the health of markets do not indicate a high chance of recession. In fact, there's only one of the very numerous indicators we use that's even remotely leaning that way. But you see pretty good market breadth. You do not see a blow off in valuations on the top. You do not see a big IPO market. You do see interest rates going a little bit higher. Any number of things could tip us towards a recession, most of them located outside the U.S.

A trade war, weakening conditions in Europe or China. For now, though, the bull does seem to have legs. There really is some very helpful material at thedividendcafe.com this week about protectionism, the concerns we have around the Trumpian trade policy. Right now, everything does feel very good, and that causes us a lot of concern. We don't like it feeling, even with a down 200-point week or something like that, the VIX is very low, volatility is very low, fear is very low. And so we are being very cautious. And a lot of the particular things with some charts that we are doing this week are laid

out for you at DividendCafe.com. We hope you will read that. So with that said, we'll leave it there for the week. I will be spending Friday next week at the annual Investment Management Consultants Association Conference in New York. A lot of really timely messages, great speakers about capital markets and innovations and risk management. And so some of these insights will get shared with you next week and the week after. management and so some of these insights will get shared with you next week and the week after you know we may see more action in the month of February and client portfolios but we're just continuing to do what we believe is best abundant communication with our clients truly deep client meetings and of course careful analytics of markets as we position our clients on a case-by-case basis

analytics of markets as we position our clients on a case-by-case basis around the right risk and reward trade-offs to their individual goals and needs. So to that end, we work. Have a wonderful, wonderful weekend. Thank you for listening to Dividend Cafe.